Financial Sector Overview: 10/10/18

The financials are always a space on the forefront of investors minds, as many like to say an overall rally without their participation is suspect. I do not necessarily agree, but their inclusion would certainly be welcomed. Of course it is a diverse group with insurance names, asset managers, etc., but the 4% weekly loss for the XLF, the week ending 9/28 is not easy on the eye, as the ETF was in the process of building the right side of a cup base that began late this January. It is too low to be considered a handle in the cup base, and the outsized weekly drop of 4%, was quite uncharacteristic for the fund since late March. The market is forward looking, typically about 6 months out so the lack of vigor in the sector could be seen as traders believing the 10 year yields are peaking here. It is true conjecture, but to me this area is to be looked at under a bearish lens, until the ETF breaks above the round 30 number.

Relative Performance:

No one can dispute the softness that has invaded the financial space. If one wants to make a contrarian argument, bulls may point to the fact that the “dumb money” is often wrong (re: retail investor). Perhaps the charts of SCHW and AMTD are trying to convey something. Both have been somewhat frail, with SCHW down 13% from most recent 52 week highs and AMTD 16%. The former has a better looking chart complexion as it holds the very round 50 figure very well and has a rounded, smooth bottoming formation. AMTD has the look of a bear flag, after a recent break below a symmetrical triangle in early September. As always one can come up with all the reasons they want and try to convince you of their bias until they are blue in the face, but the PRICE action is upon how we are judged. Respect it all the time.

Examples:

The finnie space has many scratching their heads as the textbooks say they should respond positively to higher interest rates. As the saying goes, “textbooks are best used for kindling”, and it is appropriate in this instance. As the 10 year yield rises, although Tuesday did stall, the banks have not been beneficiaries. Some of your traditional banks have acted well, with best of breed JPM only 4% off most recent 52 week highs. But compare that with MS and GS, different animals from years past for sure, lower by 22 and 19% from their recent highs. International names are not faring much better as BSMX ITUB and IBN have declined 21, 22 and 27% respectively from their highs. Below is the chart of C and how it was presented in our Friday 9/21 Game Plan. it is below the recommended pivot, but holding above the stop price, and finding support at its 50 day SMA which recently registered a bullish golden cross.